Retirement - Pensions - ISAs??

AlanP_2

These queries cross boards in some ways but for ease I am putting them all in one post – apologies for the size!.

To give a bit of context our current situation is:

I am 55 and my wife will be 55 early next year. We both work for local authorities and are members of the LGPS with a Normal Retirement Age of 66. We have 3 children but they are essentially off our hands now with the last one halfway through her degree. I am a lower rate taxpayer (no prospect of higher rate) and my wife is a higher rate taxpayer and she currently puts £120 p/m into an AVC scheme run alongside the LGPS.

We currently have a £62K Offset Mortgage at 3.09% with circa £24k (£20K is L/T savings from an endowment pay-out 4 years ago, conservative basis for remainder is a bit of easy access savings and average current account balances) offset against it. Currently pay £1250 p/m, with a typical interest charge of £100 p/m that means we are paying off £1150 p/m.

We also have a S&S ISA with Halifax (I am going to move it) that we trickle £50 p/m into, current value £6.5K.

Two things are now happening that have prompted us to assess where we are with Mortgage, Pensions and Savings / Investments.

1. A 2nd Endowment pays out at the end of this year (£11k)
2. My wife has just been promoted and will get an extra £4k a year.

Our first thoughts were to leave the £11k offset against the mortgage meaning that we would be paying £0 interest by October 2016 as opposed to the current forecast of June 2017. Either way the mortgage will get paid off by Jan/Feb 2019 but we would save an extra £680 interest by upping the offset level.

Additionally we were going to put the whole £4k pay rise into the AVC scheme by upping the payments to £400 p/m which works out about neutral by the time you allow for the 40% tax relief. That is after allowing for the standard DB salary deduction and NI at 2%.

Currently we are in reasonable shape as regards pensions and in reality a lot better positioned than many. If we left our current employers now I would get just under £10k at 66 and my wife would get around £13.5k from the DB scheme (excluding any sacrifice for a TFLS). In addition I can start drawing an older DB pension worth £9k from age 60 (if still working F/T this will be deferred until needed) with the State Pension coming online at £7.5k each. In summary that adds up to about £47.5K.

Assuming the AVC pot grows at 3% p/a (I realise that markets go up and down but needed a number to base things on) and we continue to put the £400 p/m in for 10 years I calculate that as being worth £48k, so if we took 25% as a TFLS and then drew it down at 3% p/a that would give us an extra £1.5k p/a.

Assuming that we stay within the LGPS and get a 1% pay rise per annum over the next 11 years I estimate we will have a combined pension income of £70k after taking as much in TFLS as we can, around £180k between us.

Realistically with the current public sector shake up going on and the pressure of my wife’s role (she has replaced 7 people now compared to 5 years ago LoL) we either won’t be there or she will have eased off into a lower grade role with a consequent lower salary for the last 5-7 years of employment (the built up LGPS DB level can be “frozen” at that point so you don’t lose out too much).

We feel that should make us comfortable in retirement even if we can’t afford to go on exotic holidays every 6 months.

Now that we have started to look a bit deeper and consider other options we have ended up with more questions than answers!

We want to keep the £20k+ cash offset against the mortgage as it provides an “emergency fund” if we were to need it and I don’t think I can easily beat an effective 3.09% after tax return in another cash based option.

Looking at the £11k endowment pay out the benefit of leaving it offset is not worth that much so we are thinking of putting that into either a S&S ISA and/or Pension of some kind which we can then drip feed an additional £330 p/m into fairly easily.

I started off on here looking at the ISA discussions and particularly the Vanguard Life Strategy options via one of the online platforms. I then saw comments about how investing via a Personal Pension or SIPP was a potentially more attractive option (due to the tax relief boost) especially if you are a higher rate taxpayer.

Where we have ended up as a strategy is to:

1. Leave the £20k offset against Mortgage

2. Increase the AVC contribution to £400 p/m to utilise the entire £4k pay rise.

3. Put £5.5k of the endowment and a £150 p/m drip feed into a self-managed Personal Pension (via Cavendish / Fidelity probably with Life Strategy 60/40 as the main fund) in my wife’s name to benefit from the 40% allowance.

4. Put the other £5.5k plus £180 p/m drip feed into a S&S ISA in my name (with the Life Strategy 100 or 80/20 as the main fund – instinctively feel prepared to be a bit more aggressive with this than the pension pot).

5. Move the Halifax ISA and split it 50/50 between 3 & 4 above as another lump sum investment.

Again taking a 3% annual return estimate for these I estimate that the PP pot would be worth £38k after 10 years and the ISA worth £31k. If we put the whole £11k plus £330 p/m into an ISA the same calculations say that pot would be worth £58k so splitting gains value but the options for accessing the PP pot are more constrained.

So, after all that, my main questions are:

1. Is the basic plan sound?

2. Would it be better to increase the AVC element even further and forget the self-managed PP option?

3. Would it be better for me to use a PP option as opposed to an ISA even though I am not a H/R taxpayer?

4. What else have I forgotten or am I unaware off that could have an affect or should be considered?



Thanks in anticipation.

PeacefulWaters

Could you fund an AVC in your name via salary sacrifice? If so, would it give the same flexibility as a personal pension?

What rates of tax do you expect to pay when retired?

I'm assuming no school age kids from what you've posted.

The overall plan looks good. I'd be tempted to stick more in pensions and less in ISAs but it might be as broad as it's long with more flexibility in the latter.

AlanP_2

Hi PW.


Not sure if it's salary sacrifice or not but I can add an AVC to stand alongside my LGPS membership if I want to. So far we have opted to push that for my wife as she gets the H/R tax allowance.

Would expect to be at Standard Rate tax in retirement assuming current bands rise in line with RPI / CPI and no surprises get sprung by The Chancellor over the next 10 years.

No school age children, correct.

Concern over going down the Pension route too much is the lack of flexibility as you say, but has not been ruled out by any means.

atush

Well given your age, you would have great flexibility with a personal pension as it could be paid pout any time going forwards.

But if you can get Sal sacrifice, then you would effectively get 32% relief from your Avcs?

PeacefulWaters

atush wrote: »

Well given your age, you would have great flexibility with a personal pension as it could be paid pout any time going forwards.

But if you can get Sal sacrifice, then you would effectively get 32% relief from your Avcs?

This is the trade-off I was trying to get my head around.

A PP can probably be draw "whenever" whereas the AVC, restricted to the scheme rules, provides better buying power.

AlanP_2

As far as I can tell from the literature and searching online your payments are taken off before calculating income tax. No reference to being salary sacrifice and saving the NI as well.

Management Costs are 1% it appears.

enjoyyourshoes

SIPP would provide another additional benefits

you don't buy annuity, thus the pot of money is yours & can use draw down or flexible draw down to assist.

Pot money forms part of estate and not disappear when you both die unlike your employer pensions

Also can access it fro the age of 55

As discussed get benefits from tax relief, 40% in wifes name !

mgdavid

Surely it would make most sense to get your wife out of HRT. If it were me I'd focus less on the mortgage and see if your wife could stash maybe £1500 a month into a PP or SIPP.

jem16

AlanP wrote: »

As far as I can tell from the literature and searching online your payments are taken off before calculating income tax. No reference to being salary sacrifice and saving the NI as well.

Management Costs are 1% it appears.

AVCs are not salary sacrifice with the LGPS. As you have found they are simply taken from gross pay with no NI saving.

You used to have an advantage with LGPS AVCs in that you could use the AVC pot to fund the lump sum from the main scheme. However this is no longer the case and there is no advantage to AVCs now. Far better to use a Personal Pension or SIPP as you will probably get it cheaper with better choice.

However for you there's no great advantage to using the pension wrapper at all as a basic rate taxpayer. You will have a small advantage in that 25% can be taken tax free but not much else.

Much better option is for your wife to put more into a pension and get the 40% tax relief. This does assume that she will avoid higher rate tax in retirement though.

AlanP_2

Thanks all for the comments, observations and clarification on the LGPS AVC scheme (Jem16).

I hadn't realised that you couldn't use the AVC pot to fund the TFLS anymore.

jem16

AlanP wrote: »

I hadn't realised that you couldn't use the AVC pot to fund the TFLS anymore.

It's been stopped for new applications from April 2014. If you have already got one it will continue - at least for the moment.